Growth through acquisitions: What strategic buyers need to know

All companies try to grow organically. But depending on your industry’s maturity, it’s not always easy to grow from within. One way to supplement this is to acquire another company to gain market share, says John Troyer, CPA, Audit and Accounting Services Department, Partner-in-Charge at Ciuni & Panichi.

“For companies that want to grow their topline, and hopefully their bottom line, acquisition can be the easiest path,” he says.

However, strategic buyers, especially those who are new to these transactions, need to make the right moves to ensure a ROI. This is critical in today’s seller’s market.

Smart Business spoke with Troyer about what business owners need to remember when doing an acquisition.

Is now a good time to buy a business?

There’s a lot of capital in the market. The economy is strong. So, companies have good cash flow to finance an acquisition and banks are interested in lending to their customers. But in the near future, it should remain a seller’s market — even with baby boomers without strong succession plans looking to sell. Strategic buyers are competing against financial buyers, like family offices or private equity firms, which drives prices up.

How do you find a company to buy?

Look for a business that complements your industry, product lines, customers or geography. If you buy a competitor, there’s a double benefit as you reduce competition in your existing sales space. Another target could be a supplier. Vertical integration reduces uncertainty in your supply chain.

Consulting a team of advisers certainly helps. Business brokers specialize in sales transactions and can identify available companies. Meet with your CPA, attorney and banker, and express your goals and objectives. Professionals usually have large networks and often are the first to hear a company is on the market. They also can advise you how to finance and structure a transaction.

What happens when you identify a target?

It helps to have an existing relationship before you start the conversation with a target company. The seller likely will require a nondisclosure agreement. And you, as the potential buyer, will want to negotiate a letter of intent — with the help of your advisers — to make sure the buyer is serious and realistic with the price. Sometimes emotionally attached sellers have an unrealistic view of their company’s worth.

Perform your due diligence to understand the strengths and weaknesses of a potential acquisition. An experienced adviser can identify risk and opportunities in the information provided by the seller.

How do you determine a fair sale price?

There isn’t one way to value a company. You can project the future cash flows, or look at historical cash flows, similar private transactions or the book value. Whatever method, the sale price should be set using sound financial data. There’s risk with all transactions, so make sure your projected ROI justifies what you pay.

Again, surround yourself with advisers who have been through transactions. Try to take the emotion out of it. You don’t want to be on the wrong side of a transaction — where the other side is experienced at making a deal and on your side, there’s inexperience.

What else do strategic buyers need to know?

With the rise in valuations, it can be hard for companies to find what they’re looking for at a good value.

While a private equity firm could be looking at a shorter ownership window, it’s harder to flip a company at a profit in a seller’s market. Sellers typically are looking for more cash up front, but a strategic buyer also may appeal to their emotions. A lot of sellers want a buyer who will be loyal to their employees and around for the long haul. Some sellers want to see their legacy carry on, and not be swallowed up by a larger company where the name goes away.

Buying a company takes significant capital. You have to be confident in your ability to run the new company effectively. Have a plan for the operations. Go into it with your eyes wide open, so that the acquired company is a positive contributor to your cash flow. If you’re losing money, it’s not only problematic, it can also cause you to take your eye off the ball of your existing operations.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.

The benefits of outsourcing a CFO

There are a number of companies that don’t have a CFO on staff. They might not have the budget for it, they don’t think they need one, or they think it’s enough to have a bookkeeper or a controller who manages the billing statements and books.

What gets lost in that reasoning, according to Michael Stevenson, managing partner at Clarus Partners, is the purpose of a CFO.

“They’re responsible for strategic operations,” he says. “They work in tandem with the CEO, taking on tasks and managing them so the CEO can focus on the things he or she does best.”

Smart Business spoke with Stevenson about the role of outsourced CFOs and how to deploy them in middle-market companies.

When does it make sense to outsource a CFO?

Outsourced CFOs are often brought in on a project basis to source financing, improve processes and controls or help drive the growth of the organization.

When a company is in growth mode, its working capital can be outstripped fast. A CFO can help introduce companies to different financing options, such as bank debt, asset-based lending or private equity. They can help companies find ways to raise the capital needed to sustain growth until they’re better positioned.

CEOs understand operations and their customers, but need guidance on where to find and make investments that could help drive growth. A CFO can help by taking responsibility of the financial aspects of the business, thinking about the company’s future cash flow and helping analyze the return on purchased assets.

An outsourced CFO isn’t an expense. A good one should add 1 to 2 percent of net income to the company through a strategy of finding the best return on investment, and that should more than cover whatever he or she is paid.

What arrangements should companies make with their outsourced CFO?

Each circumstance is different. In some cases, a CFO will visit with a company weekly to keep a finger on the pulse of the business. In some instances, an outsourced CFO will temporarily step into the role in companies that have lost theirs, filling the gap until a new one is hired.
Most often when a CFO is engaged, it’s on a time and material basis. A CEO might want a CFO to prepare the budget for the next two years. Sometimes the completion of one project leads to more assignments.

While an outsourced CFO’s assignment is naturally temporary, CEOs still need that person to be a business partner. A CFO hired to help with the budgeting process needs to be ingrained in every aspect of the business so it can be determined where to spend money and why. On a project basis, such as ahead of a merger or acquisition, the CFO may be directed to focus on the pluses and minuses of each opportunity, filing in any blind spots in the CEO’s vision.

Ultimately, the CEO needs to know what he or she wants from a CFO and give the CFO specific tasks. Companies that don’t have a specific project, but feel they need help that falls within a CFO’s wheelhouse, might just need a full-time CFO.

How does a company find an outsourced CFO?

There are myriad accounting and outsourced CFO firms that exist in any given region. They can be found through a web search, or through a word-of-mouth referral. However they’re found, it’s important to interview a few candidates to find the person who is the best fit not only for the task, but also for the CEO who he or she will aid. CFOs and CEOs can’t butt heads. It has to be a partnership, which is a personal thing and not a technical thing. Finding a CFO with the right personality is just as important as his or her technical ability.

In a growing business, the CEO has to know what he or she doesn’t know. Bringing in a specialist to fill those gaps is not a cost. The right outsourced CFO should bring any combination of greater profits, greater financial efficiency and better financing strategies that help the company achieve its goals.

Insights Accounting is brought to you by Clarus Partners

How positioning your business for longevity can increase its value

Business longevity is creating a business that can survive a change in ownership and/or management and thrive for many years. However, studies indicate that only 30 percent of all family-owned businesses survive into the second generation, only 12 percent survive into the third generation, and only 3 percent operate into the fourth generation and beyond.

“Preparing your company for longevity maximizes the likelihood of a successful exit in terms of price and overall outcome,” says Sean R. Saari, a partner at Skoda Minotti.

Smart Business spoke with Saari about the importance of thinking about and planning for the long-term to increase the value of a company.

What are the benefits of positioning your business for longevity?
Businesses that are positioned for longevity are almost always more valuable than those that are not. In its simplest form, the value of a company is a function of:

■  The expected future cash flows it produces for its owners.
■  The risks associated with achieving those cash flows.

There are two ways to increase value based on that basic formula: increase cash flows or decrease risk. Positioning a company in a manner that allows it to continue its success in the future without needing to rely heavily on a small group of key employees decreases the risk associated with the business.

This gives buyers more comfort that the expected future cash flows from the business will continue as expected after a sale or change in management. This reduction in risk translates to an increase in value in relation to what the company would be worth if not for the steps taken to prepare it for continued high performance in the future.

Why is positioning your business for longevity important?
Not only does positioning your business for longevity help to increase its value, it can also help separate it from other companies for sale. In a few years, all baby boomers will be at least 60 years old. Over 60 percent of privately held companies in the U.S. are owned by baby boomers.

With this as a backdrop, it is expected that there will soon be many more sellers than buyers in the marketplace, which will only make it more important to stand out from the crowd. Since most business owners’ wealth lies in their businesses — studies indicate somewhere between 80 and 90 percent — a critical element of their succession and retirement planning will center on monetizing the investment in their business at maximum value in order to support their retirement.

How do you position your business for longevity?
The most obvious area to focus on is the company’s management team, along with the adoption, implementation and execution of effective and efficient processes and procedures. If a company’s success or failure is tied to the efforts and/or relationships of a single person or a handful of key employees, work needs to be done to lessen this dependence.

The specific tactics will vary based on the facts and circumstances faced by each company, but it is imperative that enough management depth be developed so the company can survive the loss of any single employee, even its most important employee.

This can be done by ‘institutionalizing’ customers by giving them multiple points of contact within the company so that they associate with the company itself rather than with any one individual. Another best practice is to systematically ‘cross train’ employees to give them an understanding of other roles within the business so that they can step in if necessary. Any work that can be done to reduce the company’s reliance on specific individuals — reducing key person risk — helps to move the needle.

In addition, it is important to develop an exit plan — when do you plan on transitioning or selling the business? Even if the exit event isn’t imminent, setting time-bound goals will help hold business owners and their teams accountable in making the necessary progress so that when the transition or sale is nearing, the company is already as well positioned as possible to successfully overcome the change that inevitably accompanies such an event.

Insights Accounting is brought to you by Skoda Minotti

Four stages to entrepreneurial success

As in life, all businesses go through different phases of development. With each phase of development, there are different needs that are more acute or important.

“Researching and analyzing our privately held family businesses over the years, we have concluded there are four phases of an entrepreneur’s business life cycle: startup, growth, maturity and succession,” says Jeffrey Neuman, president of Barnes Wendling CPAs.

Smart Business spoke with Neuman about the phase of a business’s life cycle and the key needs companies have at each stage.

What characterizes the startup phase?
The startup phase is an exciting time for a business and represents its first five years. It is the stage at which the emergence of ‘the idea’ comes into play. Companies in this phase typically:
  Implement the business plan.
  Establish an organizational structure.
  Determine their choice of entity.
  Establish working capital needs.
  Implement simple, yet effective financial and management reporting systems.
  Acquire a proper location and facilities.
  Anticipate personnel requirements.
  Determine the costs of products or services to be rendered.
  Select a payroll service provider.
  Allocate time to analyze and brainstorm ‘the vision.’ Consider the utilization of an outside advisory board.

What stands out at the growth phase?
In the growth phase, the hard work of the prior phase is paying off and the business is heading for success. This phase usually begins around the fifth year, lasts until around year 15 and should include:
  Definition of goals and strategies to manage growth and remain focused.
  Focus on working capital needs to accommodate and sustain growth.
  Anticipate and develop personnel and establish an organizational structure to facilitate growth.
  Refine and redesign the financial and management reporting systems to measure performance and have accountability.
  Implement employee retention programs and employee benefit plans. Formalize the business’s marketing strategy.
  The entrepreneur moves into a focused leadership role, becoming more of an administrator and delegator.
  Enhance communication systems to foster continuous improvement and a total teamwork attitude. Move from a reactive to a proactive culture.

What is the focus at maturity?
The maturity phase starts at the 15th year and lasts until around the 25th year. Here:
  Profitability is usually stable and planning is more consistent.
  Divergent thinking is embraced to continue to expand the business in a more controlled manner.
  Asset management becomes an important priority. Development of compensation and incentive plans for non-owners are evaluated and instituted to bolster a high level of entrepreneurial spirit.
  Executive leadership should be highly focused on working as a team.
  Re-evaluation of the essential costs of providing products or services is crucial to maintain market share.
  Personnel development and continuous education allows for fresh ideas and improvements to business operations.
  Decentralization allows for employee development and future leaders to evolve.

What are some strategies for succession?
The entrepreneur’s life’s work culminates in the succession phase. Anywhere from the business’s 25th to 35th years, the entrepreneur succeeds the business in a manner aligned with his or her personal goals. Depending on the goals of the entrepreneur, he or she could execute an external or internal sale, or succeed it to the next generation.

External sales options include an initial public offering, sale to strategic buyer, sale to private equity firm or sale to an investor. Internal sale options include selling to the management team or selling to employees through an Employee Stock Ownership Plan.

Regardless of the option selected, the easiest way to succeed a business is to build a great business.

Insights Accounting is brought to you by Barnes Wendling CPAs

Be aware of changes to meal and entertainment tax deductions

With the recent changes to the tax law comes a change in the way meals and entertainment are deducted for tax purposes.

“This impacts everybody in one form or fashion, in every industry, from small businesses that pay for the occasional client dinner to multinationals that spend thousands of dollars on trips and sporting events,” says Maggie Gilmore, a partner at Clarus Partners.

She says the last time meal and entertainment deductions were changed, it came with increased scrutiny from the IRS, so it’s possible that it can become an issue should an audit be triggered.

Smart Business spoke with Gilmore about the changes to meal and entertainment deductions.

What had been the rules regarding the deduction of meals and entertainment?

In general, meals and entertainment for customers, clients and executives were 50 percent deductible on the taxpayer’s federal tax return. A 50 percent deduction was available for expenses incurred at a club if they were business-related — for example, for meals, golf, tennis, etc.

Meals while traveling for business or while attending a conference were 50 percent deductible, while meals provided for the convenience of the employer, such as providing meals to employees working late on a project, working over the weekend or other convenience reasons, were fully deductible by the business and the benefit would not be taxable income to the employee recipients.

Miscellaneous food and beverage provided to employees at the business were fully deductible for businesses as were office parties or company picnics.

What are the new rules?

The new rules have become more stringent. If a taxpayer takes a client to lunch, business must be conducted during the lunch to be tax-deductible. If a taxpayer takes a client to an entertainment event, such as a golf tournament, a musical performance, a football game or other like event, the 50 percent deduction is no longer available. No deduction is available for club-related expenses.

Meals provided for the convenience of the employer are reduced from 100 percent deductible to 50 percent deductible. Also miscellaneous food and beverage provided to employees at the business is now only 50 percent deductible. For both of these, beginning in 2026, none of the costs will be deductible as the law is currently written.

How significant are the deductions companies typically make in this regard?

The tax law treats the deductibility of meals and entertainment differently than how a company tracks cash flow and accounting records. The permanent difference between tax income and a company’s book income is a highlighted item on a business’s tax return, so it is an expense most companies have and would need to report on their tax returns.

There is now a definite demarcation line between partially deductible meals and full non-deductible entertainment. For professional service and relationship industries, client meals and entertainment expenses can be significant. Industries in which extensive customer and client entertainment is expected and facilitated will feel the impact more extensively than companies that have the occasional entertainment expense.

How can companies ensure they’re in compliance with these new rules?

Work with your accountant and your company expense manager to ensure that meals costs are being tracked separately from entertainment costs. For many companies, this will mean creating new accounts or sub-accounts, requiring additional documentation from employees submitting expense reports to document business purpose, attendees, dates incurred, etc.

When in doubt, talk with your accountant about expense deductibility, preferably before it is incurred. For example, if an employee attends a conference that has meetings, meals and entertainment, if the meal cost and entertainment cost are separately stated, a reasonable breakout of the expenses will be necessary for deductibility support documentation.

Meals and entertainment costs’ deductibility has changed in more restrictive ways. Preparing for correct tax reporting for 2018 is easier to start now than next April.

Insights Accounting is brought to you by Clarus Partners

Retirement plan design to attract and retain executive talent

As executives grow older, many of them want to put more money away than the limits of traditional plans — 401(k) and 403(b) plans, for example. They want to catch up and accelerate their savings before retirement. Several types of retirement plans are designed to not only help executives save more, but also defer their current income, and thus lower their current tax liability.

Because these plans are attractive to executives, they’re a recruitment and retention tool. Some plans can be designed to provide performance incentives with the reward of greater savings and deferred income. The company may also benefit from a tax deduction, depending on the plan.

“There’s more interest in these plans as the economy improves and the job market tightens up,” says Jeff Spencer, CPA, MAcc, tax principal at Ciuni & Panichi.

Smart Business spoke with Spencer about how company leaders can design retirement plans that fit their needs and provide great benefits for their executives.

What retirement plans benefit executives?

There are plans beyond the traditional 401(k) or 403(b) plans. Different allocation structures will compensate your executives, so you can attract and retain them. In fact, retirement plans for executives are common enough in larger organizations that not offering them can be a competitive disadvantage. Three common types are cash balance pension, nonqualified deferred compensation and 457(b) plans.

How do cash balance pension plans work?

Cash balance pension plans have recently gained popularity. These plans have an individual account balance, which makes them a hybrid between a traditional pension plan and a 401(k) plan. They’re geared toward older, high-paid executives who want to make large annual contributions and already maxed out their 401(k) plan limits. Depending on their age, pay, the company demographics, etc., the cash balance plan uses a formula — and the services of an actuary — to determine how much they can put away on a pre-tax basis. It could be $200,000 a year, for example.

These plans are typically utilized by smaller companies that are doing well, because once the plan is set up, the annual contribution is generally locked in. It can be very beneficial for professional service companies, law firms, consulting firms, doctor groups, etc., with a few key people who are nearing retirement. The company receives a corporate tax deduction, as well.

Cash balance pension plans also require an offset benefit that needs to be provided to some rank-and-file employees to make it work from a nondiscrimination standpoint. In a law firm, for example, the offset benefit might go to administrative staff who are lower paid and have higher turnover.

What are the benefits of nonqualified deferred compensation and 457(b) plans?

Nonqualified deferred compensation plans are best for larger employers. They’re often utilized by public companies, which want to benefit their top people who are already maxed out on their traditional retirement plan limit.

Nonqualified plans are very flexible. The company can earmark them for key people and design the plan to incentivize people to perform a particular way or create golden handcuffs to keep them around. These plans also can be designed to attract executives.

On the nonprofit side, one option is 457(b) plans. Nonprofits use them to reward, attract or retain top executives who max out their 403(b) plans. The executive pay in the nonprofit arena is typically lower, so midsize and large nonprofits sweeten the pot by adding something like 457(b) plans.

What are common challenges when designing these plans?

The cash balance pension plan is the most complex; the other two aren’t as involved to set up. But the most important thing is to ask, ‘Why are you doing this?’ Are you trying to reward people you already have? Are you trying or attract new people? What’s your end game? You don’t want to put in something that’s not going to fit your organization two or three years later — and have to go through this all again.

There are new and innovative ways to reward people, which is especially critical in today’s tighter labor market. So, if you haven’t looked at your plans in recent years, now is a good time to do so.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.

When to get a business valuation or a calculation of value

Many business owners who have had their businesses valued remember providing a large amount of information and documents that went into a long and expensive report containing only a few pages of relevant information.

Smart Business spoke with Bob Evans, a senior manager at Clarus Partners, about business valuations and a lesser known, but still useful, service called a calculation of value.

What’s the difference between a business valuation and a calculation of value?

A full business valuation is a formal document that arrives at a thoroughly documented conclusion of value. It contains extensive background information about the company and its management, its economic environment, and historical and sometimes projected financial statements. It’s designed to provide enough information to enable a person having no prior knowledge about the company to read the report, understand the company, and also understand the rationale and methodology used to value the company. In theory, the report should be so well documented that the reader would come to the same conclusion as the author.

In a calculation of value, the appraiser and company agree on a limited amount of background support and/or procedures to be used to calculate and document the value of the company. The conclusion is then expressed as a calculated value.

A calculation of value report can be significantly less expensive than a full valuation report, and under the right circumstances just as useful. This is because even though the background support is less, the analysis done within the agreed upon methodology is the same whether the report is a conclusion of value or a calculated value. However, a calculation of value report is required to include a disclaimer stating that had a valuation engagement been performed, the results may have been different. This makes a calculation of value report inappropriate in certain situations.

In a calculation of value, a detailed history of the company, management biographies, analysis of competition and a discussion of the economy can be reduced or eliminated. Support for the rationale used in the report may also be reduced.

A full valuation must consider value using each of the income-based method, market-based method and asset-based method. In a calculation of value, it may be agreed that only one or two of the methods are considered.

When is a calculation of value report useful?

Calculations of value are useful when the users of the report are familiar with the company — for example, if an owner is thinking of retiring and wants to estimate the proceeds from the eventual sale of the business. It’s useful when business owners receive an unsolicited offer to buy the company and want to know if the offer is a good one, or for new owner buy-ins and when retiring owners are bought out. Calculations of value may be useful when drafting or periodically reviewing buy-sell agreements and the adequacy of the life insurance that funds them. A divorcing husband or wife trying to settle on a property division in an inexpensive and amicable way may agree to use a single calculation of value to value the business.

When is a full valuation report required?

Generally, a full valuation report is required any time the report will be used in a court case or submitted to a third party for an official purpose. A full valuation report is required any time the report will be submitted to a court or to the IRS. The required disclaimer makes calculation of value reports inappropriate for official uses. If there is any question whether a calculated value is acceptable for the users of the report, it’s important for the accountant to know before work begins.

What is the takeaway for someone considering having their business valued?

The primary takeaway is that calculation of value reports cannot be used in submissions to third parties in an official setting, such as an income or estate tax filing, or to a court trying a case. In these third-party situations, the report will not be accepted. However, if the report is for internal use only, a calculation of value is a cost-effective level of service that can still deliver useful information.

Insights Accounting is brought to you by Clarus Partners

Cryptocurrency, blockchain will have a major impact on businesses

Cryptocurrency has the potential to be as disruptive to society as the creation of the internet, affecting the way we transact with family, friends, colleagues, banks and customers. And bitcoin, the most recognizable cryptocurrency, put blockchain on the map, which has created a massive use case for the technology.

Since the first bitcoin transaction occurred in 2009, companies have come to accept bitcoin for payment, as well as a means to paying employees’ wages. Blockchain, meanwhile, is introducing greater security and efficiency in the critical processes of many industries.

Smart Business spoke with Dennis C. Murphy Jr., a senior manager at Skoda Minotti, about what business owners should know about cryptocurrency and blockchain technologies.

What should companies do to prepare themselves to transact with cryptocurrency?
Cryptocurrency is volatile, so whether it’s adopted for investments or transactions depends on how risk averse the individual and business is — bitcoin’s value could be nothing tomorrow, and that’s important to keep in mind. There are also operational considerations, such as the administrative aspect — tracking trades, payments and receipts — and the custody aspect, which is how to store the currency securely.

Cryptocurrency lacks regulation, which means there’s no regulatory body to adjudicate a dispute. It’s intentionally decentralized. As a business or investor, that lack of regulation could be a serious threat.

Any business owner looking to deal with cryptocurrency needs a very good understanding of it. Working with a trusted adviser who has knowledge to help a business through it is key.

Under what circumstances could cryptocurrency benefit a business?
A company that accepts bitcoin as a form of payment could potentially expand its customer base as a result. It’s a global phenomenon, so the move has the potential to open up the business to the international marketplace.

Cryptocurrency can also reduce payment processing fees because it has lower transaction fees than credit cards. Further, transactions are permanent so there are no questionable chargebacks.
If managed correctly, transactions are secure thanks to strong encryption. It’s also a way for a company to diversify its assets.

How is blockchain technology being used?
Some countries and local governments have turned to blockchain to help ease the burden of real estate property sales and title transfers, thus reducing paperwork and making it more difficult to forge records.
The automotive industry has used blockchain to streamline supply chain management, reducing human error, waste and additional manpower throughout.

Blockchain provides the health care industry with data exchange systems that are cryptographically secured and irrevocable — a good fit when working with patient data.

Banks have begun to implement blockchain to reduce fraud by spreading out information over the blockchain database where it’s verified on various terminals. They’re also using blockchain to transfer money faster and cheaper, and to more easily obtain compliance information on their customers when dealing with regulators.

In accounting, blockchain can reduce errors when reconciling complex information from multiple sources. It also can decrease the amount of time it takes to complete an audit and reduce fraud.

What are some security considerations, advantages and challenges of blockchain?
Blockchain networks have an auditable operating environment with comprehensive log data that can be tested for compliance, providing security through verified transactions, locked contracts on the distributed ledger and a single set of records that can be viewed by all members.

It has the potential to eliminate reconciliations, duplicate ledgers and disputes over contract terms. Efficiencies are gained since information is continuously updated and intermediaries are removed from the transaction process.

Cryptocurrency and blockchain can be transformational for a business — they are important subjects to understand. With the help of a trusted adviser, businesses can be ready when the opportunity arises to use them.

Insights Accounting is brought to you by Skoda Minotti

Cash management tips help business owners add efficiencies

Business owners have to focus on sales, profitability, innovation, employee matters and more. But if cash management falls down the priority list, it can get your company into trouble.

Business owners may count on a controller or CFO to monitor the situation, but it’s not uncommon for bad news to be delayed. Other owners hide bad news from lenders, hoping things improve. Keeping your bank informed is important, yet business owners can struggle with what to say and when to say it — but generally, it’s best to share more.

“Cash management is a contact sport. You can’t leave it to chance,” says Mike Klein, CPA, MBA, partner in Audit and Accounting Services at Ciuni & Panichi. “If you’re generating profit, where is the cash? Is it sitting in accounts receivable where you can’t spend it?

Smart Business spoke with Klein about his cash management advice.

How should business owners use the balance sheet to support cash management?

Your reporting dashboard should include metrics like total cash position. Also, look at key ratios on the balance sheet, like days in receivables, days in payables or days sales in inventory, in a timely fashion. Then, drill down. Are those ratios trending favorably or unfavorably, and what’s behind the change?

What helps ensure customers pay on time?

Bill quickly, with a short lag from the time you deliver a service or good to the time you invoice. Getting the clock started is especially important with large enterprises where you have limited influence on how they pay. In some cases, you can negotiate sales terms. If cash is tight, incentivize customers to pay faster with discounts. Also, are you making it easy, with many ways to accept payment?

Encourage your employees to build relationships with accounts payable personnel. Customers will be less likely to stall payments to people they know. Also, if you know when they cut checks, you can time your invoicing to be included in the check run.

Understand your leverage: Can you stop delivering services or go to cash in advance? Business owners may hesitate to take these tactics, but a customer that doesn’t pay isn’t a customer. Be realistic in assessing credit quality and risk. Set formal policies for how much credit to extend. Are your salespeople making good decisions? No one likes to turn away business, but it doesn’t do you any good if it’s profit that doesn’t turn into cash.

If you’ve got large receivables, consider buying credit insurance to help manage risk.

How can owners right size their inventory?

To an extent it’s possible, you need good sales forecasts, which inform the inventory levels and production schedules. Also, set safety stock levels to provide order points. Make sure your inventory and purchase managers are evaluated against metrics and consider incentivizing them where needed to get inventory down.

Cycle count the inventory. If accounting records are out of line with the warehouse, it’s tough to make good decisions. Maybe people know the system isn’t accurate, so they keep excess inventory to hedge. Or, if inventory starts disappearing, investigate to see if fraud might be occurring.

Know your suppliers. What are their delivery schedules or flexibility to meet last-minute demands? Do you have multiple sources? This can help keep inventory lower.

Again, monitor the key ratios, and benchmark them against industry leaders and your past performance.

Where can accounts payable be improved?

Negotiate terms where possible — try to minimize your cash gap. If you collect receivables in 90 days and pay vendors in 60 days, that’s a 30-day cash gap. The cash gap is funded through a line of credit or reserves. With external funds, you pay interest and as rates rise, it costs more. With reserves, there can be opportunity cost. You may not be able to start a new project or innovation because your reserves are funding receivables.

Multiple suppliers may give you leverage when negotiating payment terms. With so many moving parts, you can influence some more than others. Be efficient with what you can manage, and plan for the things that you can’t. So, if a big box store won’t pay for 100 days, know where you’ll get the cash to float the difference — that’s why relationships with bankers and suppliers are important.

Insights Accounting is brought to you by Ciuni & Panichi, Inc.

Your accountant is more than a number cruncher

Often business owners see their accountants as number crunchers — someone to handle taxes, financial statements and the like. What they tend not to see is a business partner.

“Accountants can and should be included in discussions about a person’s business and their expectations for it,” says Cheryl A. Fields, senior sales and use tax manager at Clarus Partners. “Be comfortable with your accountant. They’re really a business partner, so make sure they’re clued in to your plans so they can be more responsive to your needs. The business can only be better for it.”

Smart Business spoke with Fields about how business owners can get the most out of their accountants.

Why might business owners not take full advantage of their accountants’ capabilities?

Business owners often don’t know all that their accountants can do, primarily because they don’t have a full understanding of the accounting profession. They don’t know all they can ask their accountants to do. Accountants have access to a lot of information. It is their responsibility to keep up with all that’s happening with their clients’ businesses. However, if they’re kept in the dark, say about a desired expansion, the accountant can’t go looking for municipal credits that can be used to offset the costs.

On the other side, accountants need to do a better job of asking questions about not only what‘s happening, but also what the business owner is thinking so they can be proactive.

Discussions around tax strategies should be deeper than a cover sheet with bullet points. There’s a lot going on with tax laws. Businesses that work with their accountants to understand the changes can come up with an effective strategy to take advantage of them.

How should business owners start the process of building a better relationship with their accountant?

It really comes down to communication. Set up a time outside of tax season to discuss high-level planning — for instance, an in-depth state of the business and future plans.

Also, business owners should talk to their accountant about their expectations for the relationship. This is both an opportunity for the business owner to voice what they need, but also for the accountant to explain what other services they can provide.

What is an accountant’s responsibility when it comes to getting more out of the relationship?

Accountants should help their clients understand what they’re capable of. They should reach out during the year to check in on busy executives. Ask how things are going or have a lunch meeting to talk about the business. Send articles that cover an issue that could affect the business — a new law, for example. If an accountant is only reaching out to talk tax prep, it could be a sign that they don’t understand the person’s business or that they lack the interest or ability to expand the relationship.

Business owners need to trust their accountant. Accountants necessarily work with confidential information, predictive numbers and strategic plans. Business owners who are the least bit hesitant to disclose information to their accountant need to find someone new. An accountant should also be someone a business owner likes to work with. If the relationship is strained, get references and find someone better.

How do business owners benefit from a better relationship with their accountant?

Business owners who have a good relationship with their accountants find themselves with better tax planning opportunities and a step ahead of legislation, which gives the business time to prepare.

Also, accountants are objective outsiders who might see things internal people miss or that an inside person could be reluctant to bring attention to. In that way their perspective can be valuable.

Ultimately, keeping an accountant in the loop helps business owners on the front end, enabling them to put their business in the best financial situation. Accountants aren’t just numbers crunchers. They are trusted, knowledgeable business partners in a unique position to offer advice.

Insights Accounting is brought to you by Clarus Partners